The condition of thousands of loans given to small-time property investors and landlords now holds the key to how much more the Irish banking system will need in capital, the Irish Independent has learned.

The condition of thousands of loans given to small-time property investors and landlords now holds the key to how much more the Irish banking system will need in capital, the Irish Independent has learned.

Risky buy-to-let loans are getting the most intense scrutiny of all the assets held by the Irish banks as EU/IMF-commissioned stress tests near their conclusion. The results are due at the end of March.

The surprising disclosure by Belgian lender KBC in early February that almost 11pc of its buy-to-let loans are in arrears has caused loan experts used by the Central Bank to pay additional attention to the area.

Random sampling and detailed modelling on this area has stepped up in recent days, sources pointed out. The Central Bank is using giant US fund manager Blackrock to price the loans held by Irish banks. The loans are being tested using different scenarios, with Barclays and Boston Consulting Group also working for the bank.

AIB has said almost a third of its mortgage book is made up of buy-to-let loans, and Bank of Ireland told investors recently: "We have a particular issue in a component of our buy-to-let book and the arrears are quite high there. We've identified that and we have necessary actions in place to deal with that."

Stress tests

Some €10bn is already scheduled to go into the banks, but the stress tests are designed to establish whether another €25bn of so-called "contingent capital" will be needed. The stress tests are not completed and reports suggesting €25bn may be needed for the banks have been described as "premature" by sources.

Irish banks, according to figures produced in late 2009, have a combined mortgage book of €102bn, with up to a quarter in the buy-to-let area, which traditionally defaults at higher levels than the homeowner segment.

KBC is one of the banks in the Irish market that has provided up-to-date figures on buy-to-let versus owner-occupied loans. In February, it put arrears on owner-occupied properties at 7.4pc for 90 days or more, while buy-to-let loans were showing 90 days-plus arrears of 10.9pc. "The buy-to-let segment is the most vulnerable," said a source familiar with the tests.

The stress test, known as the Prudential Capital Assessment Review (PCAR), needs to have international credibility and the involvement of Blackrock is seen as essential to this.

The IMF's chief official in charge of designing the Irish bailout package, Ajai Chopra, told the Irish Independent previously that tracker mortgages were an area of concern. But their main effect was to reduce the profits of the Irish bank, rather than arrears at this stage, said one source.